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Registration date : 2007-07-01
 | Subject: Dollar Falls on Discount Rate Cut  Sat Aug 18, 2007 11:37 pm | |
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Daily Forex Strategy Briefing
Dollar Falls on Discount Rate Cut
Sat, Aug 18 2007, 07:05 GMT by Hans Nilsson CMS Forex
- The
yen pared overnight gains after the Federal Reserve on Friday cut the
discount rate on loans to banks by 0.5 percentage point, to 5.75% and
acknowledged downside risk to the US economy from the global credit
crunch. Meanwhile, the dollar fell against the euro, sterling and
dollar block currencies on the partial easing move from the Fed.
- The
EUR/JPY fell to the lowest level since October on massive unwinding of
yen carry trades sparked by the global credit crunch. The chart below
shows the pair has been unwound in a very short period. There is
support at 150 and resistance at 156, but the market is volatile so the
pair can move dramatically again.
- The
dollar index unsuccessfully tested the resistance from the bear-trend.
Today’s Fed move “to promote the restoration of orderly conditions in
financial markets” eased safe-haven flows into the dollar. However, the
credit crunch is not over yet. A break of the resistance will have a
positive effect on the dollar.
 Financial and Economic News and Comments US & Canada
- The
Federal Reserve cut the discount rate, the interest rate the Fed
charges to banks, by 0.5 percentage point, to 5.75%, acknowledging a
policy shift is required to contain the subprime-mortgage trouble. The
Fed did not change its target for the federal funds rate, still at
5.25% for more than a year. However, the Fed is likely to cut the fed
funds rate at its next meeting in September. The discount-rate cut will
assist in lending to institutions in need of financing as the Fed will
accept a broad range of collateral including home mortgages. Today’s
Fed action also includes an extension in the discount window borrowing,
allowing 30-day financing that is renewable, instead of a standard
overnight loan.
- US consumer confidence
fell more than expected to 83.3 in August, the lowest reading since
August 2006, from 90.4 in July, as falling stocks and widening credit
crunch added to worries about weakness in the US housing market, the
Reuters/University of Michigan preliminary sentiment index showed.
Europe
- German
producer prices unexpectedly fell 0.1% m/m and slowed to a 1.1% y/y
rate in July, the lowest reading since April 2004, the Federal
Statistics Office said. Inflation in the EMU appears benign and the ECB
is unlikely to raise interest rates as long as the present credit
problems persist.
Asia-Pacific
- The
Reserve Bank of Australia intervened in the FX market for the first
time in 6 years, since the Australian’s dollar was allowed to trade
freely in 1983, to stem the Aussie’s steepest decline. The global
credit crunch has made financial markets “extremely skittish,” RBA
Governor Glenn Stevens said. “Where market conditions are disorderly,
we are prepared to intervene from time to time,” he said.
- Japan’s
top financial diplomat, Naoyuki Shinohara, reiterated the Ministry of
Finance’s standard line on currencies, saying he was watching the
market carefully but would not comment on specific levels. It is
unlikely the Bank of Japan will raise interest rates at its meeting
next week.
- Japan’s leading economic indicators index fell more than expected in July to 72.7.
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